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Why Inflation Isn't A Moral Issue

One of the recurring themes you see in debates over monetary policy is the idea that inflation is a moral issue. People will often point out indignantly that today’s dollar is worth only five percent of what dollars were worth a century ago. Inflation hawks sometimes describe inflation as a kind of theft.

Clearly, really high levels of inflation have devastating economic consequences, as Weimar Germany and modern-day Zimbabwe have discovered. But so long as inflation is kept at the moderate, largely single-digit levels Western democracies have seen in recent decades, moralizing about inflation simply doesn’t make sense. There’s no particular reason to prefer an inflation rate of 0 to a 2 percent or 4 percent inflation rate, and indeed, the latter may have important advantages.

Economists like to say that money serves two primary purposes: it serves as a medium of exchange and a store of value (many also describe it as a unit of account, but this is largely a consequence of the other two functions). Inflation—even in the single digits—prevents money from working effectively as a long-term store of value. If you were born in 1920 and your retirement plan was to put $100 bills under your mattress, the inflation of the 1970s would have destroyed the majority of the value of your savings.

The problem with this line of argument is that even stable money is a bad long-term store of value. That’s because modern capital markets offer you the opportunity to not just preserve the value of your money but dramatically increase it by investing in productive assets. You can buy stocks, bonds, or real estate, all of which generate a stream of income that increases the value of your investment.

Stocks and real estate are inherently inflation-protected; if the price level doubles, the value of your house and your shares of Microsoft stock will double with it. And bonds typically pay an interest rate that “prices in” the expected rate of inflation over the course of the bond’s life. So an economy with a consistent inflation rate of 5 percent isn’t particularly better or worse for savers than an economy with a stable price level.

Of course, unexpected changes in the price level can cause losses (or gains) for savers. But given how easy it is to invest in inflation-protected assets, it’s hard to see why this should be regarded as an injustice perpetrated against people who hold dollars. If I invest my life savings in oil, and then Saudi Arabia discovers a massive new oil well that causes the price of oil to drop by 10 percent, it would be silly to say that Saudi Arabia has stolen 10 percent of my life savings. I just made a bad bet. Exactly the same point applies to money.

So there’s an important assymetry between the “medium of exchange” function of money and its “store of value” function. There are many alternative assets that can perform money’s “store of value” function;some of them perform the role even better than dollars do. But only dollars play the “medium of exchange” role in the United States. That’s why if there aren’t enough dollars to go around, people start cutting back on their spending and the economy goes into recession. So it’s foolish for a central bank to become so concerned with preserving the long-term value of the dollar that it fails to provide enough liquidity, thereby tipping the economy into a recession. Ensuring that money performs its “medium of exchange” function well should be a central banker’s top priority, even if that means allowing the currency to lose value over time.

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The reason 2 to 4 percent inflation can be beneficial is that thanks to sticky wages an economy with 2 to 4 percent inflation may be less recession-prone than an economy with stable prices. But that wasn’t really the point of my post.

I agree with you that printing more money reduces the purchasing power of existing holders of money. But why is that a moral issue? Again, if the Saudis increase production of oil, it decreases the wealth of existing oil-holders, but we wouldn’t say Saudi Arabia has stolen from existing holders of oil. Why is money different?

“I agree with you that printing more money reduces the purchasing power of existing holders of money. But why is that a moral issue? Again, if the Saudis increase production of oil, it decreases the wealth of existing oil-holders, but we wouldn’t say Saudi Arabia has stolen from existing holders of oil. Why is money different?”

It’s different because oil is an actual product that is of value. Money is just a medium of exchange and store of value and worthless for anything other than that. And it’s also because the United States government has a monopoly on the creation of it that it maintains with force.

Given enough time the supply and demand curves for labor would hit equilibrium. The sticky wages in which you mention implies that the price of labor is too high. So you get to let people think they are making the same amount of money by keeping the labor price the same then creating more and thus reducing the value. That is a theft whether it be 2% or 4%. This labor price issue would correct just fine if the employers and the laborers were able to come to realistic value of what money is in the market. And it is entirely relevant to your post because you say that inflation is not a moral issue. It most certainly is an issue when theft is involved because there are most definitely parties on both side, one in which receives and the other at the loss.

In regards to your second point there is quite a large difference. That is simply when you chose to invest your life savings in oil you made and informed decision and knew the risks before you made your investment. When it comes to the dollar people are forced to use it for the settlements of debts. Just look at what it reads on the bill. There are external factors that force the use of dollars for exchanges in the US. How can you say it is the same thing when you made your decision by choice but the populace is forced to use the dollar as a medium of exchange? That is what fiat means right? If people had a choice to avoid the usage of dollars and participate in exchanges on an open market what do you think the result would be? In one case you made the choice to make your investment and in the others everyone is forced into a loss. Entirely different situations no?

What does increasing the production of oil have to do with inflation? Or what does a supply and demand problem in the oil markets have to do with the general price level?

Inflation is a monetary phenomenon. And inflation is invariably a consequence of excessive government expenditure funded by borrowing. The generation of large amounts of money expended with little or no purpose, like on all that green energy for instance.

If the price of energy rises, is this inflationary or deflationary?

Well, it has a deflationary effect because people will now have less money, assuming the money supply is stationary, to buy other things. Rising energy prices are recessionary.

You should learn to separate the price of a good as determined by supply and demand issues from the general level of prices as reflected in the quantity of money available.

So when the general level of prices rises by 2 to 4% a year, you declare this a benefit? How on earth is the deteriorating value of a dollar a benefit to anyone that holds it, especially now when in the depths of a recession people are forced to pay more for the necessities when they can least afford to?

You tell me how giving me 4% of your financial holdings at the start of the year for no purpose whatsoever is a benefit to your finances.

“And bonds typically pay an interest rate that “prices in” the expected rate of inflation over the course of the bond’s life. So an economy with a consistent inflation rate of 5 percent isn’t particularly better or worse for savers than an economy with a stable price level.”

Oh really?

What high credity quality bonds today are princing in the expected rate of inflation?

The federal reserve is deliberately stealing the wealth of savers by holding interest rates artificially low. The savers wealth is being stolen to benefit banks and borrowers.

Inflation is good for borrowers and bad for investors in bonds (the lenders). Monetizing the debt via inflation is one of the oldest tricks in the book of governments to effectively default on their debt. They United States government is doing exactly the same thing.

And of course the government’s measure of inflation, the CPI is as phony as a 3 dollar bill. It excludes food and fuel, two of the biggest inflationary components in the real world.

Government intervention of any type be it fiscal or monetary never “improves” any economy. All it ever does is forcibly transfer wealth from some to others.

In fact, there was never any need for this country to have a central bank at all to begin with. The idea for one was sold on the idea that it could “smooth out” the waves of economic cycles. But the performance of the national economy after the Federal Reserve was created and started “managing” things hasn’t been one iota superior in any way to the way it perfomed from the beginning of the nation up until the time the Fed was created.

I’m not sure your average middle class family can easily invest in “modern capital markets” to beat inflation. And even if they could, its no excuse for central bank induced inflation.

And how about people on fixed income? Or pensions? Are we not stealing from their future purchasing power when we inflate?

Inflation might not phase the upper/investing class, but 3% rise in food prices can make or break middle class family. Inflation is theft and it forces hard working people to become speculators for the security of their families.

But its not even about morality. Inflation hawks would tell you that their concerns are based more in pragmatism than morality. The moral argument is just more assessable to the average person following the debate.

“If I invest my life savings in oil, and then Saudi Arabia discovers a massive new oil well that causes the price of oil to drop by 10 percent, it would be silly to say that Saudi Arabia has stolen 10 percent of my life savings. I just made a bad bet. Exactly the same point applies to money.”

Not so. If you are hit by a falling tree, you will suffer, but it will not be the fault of any one person. While unfortunate, the results will be morally neutral. But if you are hit by a baseball bat, the chances are that some person was swinging it.

Discovering more oil is like the falling tree. Inflation is like the baseball bat. Governments reap ill-gotten gains from inflation. That’s why they do it. It’s not an accident, and it’s not a fact of nature. It’s a policy choice.

That said, there are indeed sound reasons for a low and very steady rate of inflation. The biggest one is that deflation is much worse than inflation, and that hitting a perfectly steady 0% inflation is impossible. Better to err very slightly on the side of inflation.

Note that as long as that rate does indeed remain very low, no one can say they have been defrauded: They knew what the rules were when they entered the market for money, and if the rules said roughly 2% inflation, then they had no basis for complaint if that’s what the rate really was.

I don’t understand your analogy. It seems to me that the discovery of a new oil field is the “fault” of the company/government/whoever that did the necessary exploration in exactly the same way that the inflation is the fault of the government. The existence of the oil is a “fact of nature,” but the process of finding and extracting it is not. And people who find new oil fields reap exactly the same windfall profits from selling the oil that governments reap when they spend newly-created dollars.

Everyone expects that an oil exploration company will find oil. That’s part of the oil business. And the benefit reaped by the discovery comes in lower prices at the pump. With less money directed to energy, people enriched now have more money to spend on other items.

There is a huge difference between one investing in oil before a sudden drop caused by myriad supply and demand issues.

Government borrowing huge sums of money on behalf of others and squandering it, causing immense demand on an aggregate supply they contribute nothing to, results in inflation. The remedy consists in pandering disaster to ignorance. Our political and administrative apparatus is filled with such corrupt, wasteful, self-serving dolts.

Market conditions in respect of any product can create winners and losers.

The government and its leaders knowingly squander without an genuine care for the damage inflicted. And there is no shortage of contemptible wretches, especially among economists, that will defend this stupidity.

Look at that Nobel winner, Krugman, as the exemplary. Here’s a moron that sees one failure after another in excessive government expenditures. When finally some reasonable persons begin to question the futile remedy and act accordingly, Krugman in fine form laments that this retreat as cowardice.

Inflation is a direct result of excessive government expenditure funded by borrowing. That is a fact. Any government engaging in this remedy will cause misery for those they are supposed to serve.